Dollar Evolution - Federal Reserve: Kevin Warsh's Arrival Reshapes the Landscape for Mauritius

The recent appointment of Kevin Warsh as the head of the American Federal Reserve has reignited discussions about the evolution of the dollar. With psychological market reactions, monetary issues, and geopolitical pressures at play, the potential repercussions for Mauritius are expected to be both varied and significant.

In the very short term, the movement of the US dollar largely hinges on the psychological reactions of the markets. However, this often underestimated aspect remains crucial. This is the conclusion drawn by economist Bhavish Jugurnath, who argues that the perception of credibility and firmness in the future direction of the US central bank plays a key role in investor expectations.

According to Jugurnath, Warsh's appointment has been positively received by certain sectors of the financial markets. Known for his in-depth understanding of financial mechanisms and dedication to strict monetary discipline, Warsh is seen by investors as someone committed to fighting inflation. "Markets tend to respond favorably to a central bank leadership perceived as experienced, credible, and firm against inflation," explains Jugurnath. He notes that this announcement has rekindled interest in the greenback, with renewed support already observable as investors adjust their expectations.

Short-term Support, but Conditional
In the short term, the dollar is expected to remain relatively strong as long as markets anticipate high US interest rates or delayed rate cuts. However, this dynamic is closely tied to upcoming macroeconomic data. "Strong statistics would reinforce the current trend, while weaker signals could lead to a consolidation phase," warns Jugurnath. He also reminds us that the dollar often benefits from its status as a safe-haven currency during uncertain times, a factor that continues to work in its favor amid ongoing geopolitical and economic tensions worldwide.

Amit Bakhirta, CEO of Anneau, remains cautious. He believes that two to three days is too short a timeframe to draw definitive conclusions about the evolution of such a central currency as the US dollar. "Nevertheless, in the very short term, it is likely that the US dollar will trend downward and weaken further," he posits. According to him, the key indicator will be the dollar's ability to maintain its status as a safe haven during a potential major stock market correction.

Monetary Firmness Amid Political Pressures
Imrith Ramtohul, Head of Investment Consulting at Actuarix Consulting Ltd, shares the view that Warsh's appointment signals monetary firmness to the markets, though it does not eliminate medium-term uncertainties. "Markets see Warsh as someone likely to adopt a more rigorous approach to combating inflation, which naturally supports the US dollar," explains the financial analyst.

However, he notes that this dynamic could be counterbalanced by political and budgetary factors. Ramtohul reminds us that the US dollar is expected to remain volatile in 2026. He specifically points out that President Donald Trump has repeatedly expressed a preference for a weaker dollar to support US exports. "Additionally, high levels of public spending and increasing national debt could also exert downward pressure on the currency," asserts the financial analyst.

Imports: A Heavier Bill for Mauritius
For Mauritius, a small open economy heavily reliant on imports, the implications of a strong dollar are immediate. "A stronger dollar generally translates to higher import costs for Mauritius," warns Jugurnath. Many essential products, such as fuels, foodstuffs, machinery, pharmaceuticals, and intermediate goods, are priced in dollars or influenced by global prices expressed in this currency. "When the dollar strengthens, these imports become more expensive in rupees, directly impacting inflation, production costs, and household purchasing power," explains the economist.

Ramtohul agrees, emphasizing that "much will depend on the dollar's evolution." A strong greenback would increase the costs of essential imports, particularly fuel and food products, leading to higher inflation and cost of living. "Conversely, a weaker dollar would reduce the cost of imports priced in US currency, which would be broadly positive for the economy," he adds.

Bakhirta also highlights the accelerating global de-dollarization movement. He notes that the BRICS digital currency pilot project and the gradual disengagement of central banks from the dollar in favor of precious metals, particularly gold, reflect growing concerns about the sustainability of public finances in developed countries. "Traders are now engaging in what is termed the 'Debasement Trade,'" he explains, referring to fears of fiat currency devaluation. "In this context, as long as we continue to stabilize the rupee, it could strengthen, with beneficial effects on inflation, consumers, and importers," he asserts.

Exports: Mixed Effects Depending on Markets
The impact on local exports appears more nuanced. A strong dollar can enhance the competitiveness of Mauritian products in the US market. "Our products become relatively cheaper for American buyers," notes Jugurnath, which could support sectors like textiles, clothing, or seafood.

However, he cautions that the United States does not represent Mauritius's primary export market. Europe and the United Kingdom remain significant outlets. "If the rupee does not depreciate at the same rate against the euro or the pound sterling, exporters could face margin compression," warns the economist.

Ramtohul also points out the indirect effect of a weaker dollar on the euro. "A weakening dollar usually leads to an appreciation of the euro, as was the case in 2025," he observes. For him, a strong euro is a major advantage for Mauritius, particularly for tourism and exports targeted at the European market.

For Bakhirta, the impact on exporters should be evaluated in terms of real productivity. "Growth based on a devalued currency always ends up being felt severely," he contends, estimating that the effects could be mixed but overall positive in the long term.

Consumer Price Pressures
A strong dollar inevitably affects consumer prices. "In a country like Mauritius, a stronger US dollar generally translates to upward pressure on prices," explains Jugurnath. This imported inflation particularly affects fuel, transport, imported food products, medicines, and everyday consumer goods. "If the dollar remains strong over an extended period, inflationary pressures tend to become more pronounced," he asserts.

Ramtohul believes that the impact remains uncertain and will depend on the dollar's actual trajectory. "If the dollar continues to strengthen, consumers could face rising prices," he explains. Conversely, a weaker dollar would lead to lower import costs and potentially lower prices for consumers.

Bakhirta further nuances this assessment, suggesting that price increases could be contained if a weaker dollar or a global economic slowdown were to weaken overall consumption.

Investment: Opportunities and Currency Arbitrage
From an investment standpoint, the effects vary according to currency exposure. "An appreciation of the dollar would be positive for local investors holding dollar-denominated assets," Ramtohul explains, as the value of these investments would increase in rupee terms. He suggests that a strong dollar could also make Mauritius more attractive for foreign direct investment, with investors receiving more rupees for each dollar invested.

"Conversely, a prolonged weakening of the greenback would yield lower returns for investors exposed to the dollar," he points out. The analyst already notices "a movement of institutional investors seeking to diversify their portfolios into other currencies" to reduce their dependence on the US dollar. Bakhirta reminds us that "a stronger currency is always an asset for investment, ceteris paribus."

Foreign Exchange Market: Improvement Expected in the First Half of 2025
Conditions in the domestic foreign exchange market showed signs of improvement in the first half of 2025, according to the latest Financial Stability Report from the Bank of Mauritius. This evolution is attributed to an increase in capital inflows and a reduction in speculative pressures, while demand for foreign currencies remained robust.

Volatility persisted at the beginning of the year, driven by the weakness of the US dollar globally and local market dynamics. To restore stability and enhance liquidity, the Bank of Mauritius implemented targeted measures, including stricter controls on forward pricing practices and periodic interventions.

The rise in the benchmark interest rate in February 2025 reversed the negative interest rate differential with the US dollar, helping to limit depreciation pressures and support confidence in the foreign exchange market.

Activity in this market intensified in the first half of 2025. The turnover of banks and currency brokers reached $7.9 billion, a 19% annual increase compared to the same period in 2024. Currency purchases and sales increased, partly due to strong demand for car imports ahead of the implementation of new taxes.

The rupee appreciated by 4.9% against the US dollar but depreciated by 7.2% against the euro, in line with global monetary trends. The Bank of Mauritius reduced its interventions, selling only $50 million during the period, compared to $365 million in the previous half.

These figures reflect a more stable evolution in the foreign exchange market, while underscoring the importance of monetary measures to manage currency flows and liquidity.